Granny flat tax arrangements under review

The Government has asked to Board of Taxation to review the tax treatment of granny flat arrangements and recommend any changes that would encourage families to enter formal family agreements and not ad hoc, unenforceable agreements that often put elderly people at a disadvantage.

The review comes in the wake of last year’s Australian Law Reform report on elder abuse, which identified tax issues that might deter families entering into family agreements relating to accommodation.

A homeowner may have to pay capital gains tax where there is a formal agreement for a family member to reside in their home, either in the same dwelling or in a separately constructed dwelling.

In its review, the ALRC says the use of formal and legally enforceable family agreements would be a useful measure in preventing elder abuse. Such agreements protect the rights of the older person if there is a breakdown in a living arrangement.

However, the capital gains tax issue has been a deterrent to the development of family agreements.

The Government has asked the Board of Taxation to make any recommendations as to the appropriate tax treatment of these arrangements, considering the current tax law and the treatment of granny flats under the social security rules.

It has also asked the Board to recommend ways to raise awareness and provide incentives for older people and their families to enter formal and legally enforceable family arrangements. The Government has asked for a final report by the middle of next year.

The ALRC is concerned that many ‘family agreements’ are made informally, without legal advice and without being put in writing. Typically, older people transfer the title to their home, or the proceeds from the sale of the home or other assets, to an adult child in exchange for ongoing care and housing.

According to Australian Bureau of Statistics figures for 2011, 8.2 per cent of people aged 65 year and over were living with their children or other relatives. Among people over 85, 12.2 per cent were living with children or other relatives.

If the promise of care is not met or the relationship breaks down, under an informal agreement the older person may be put at a disadvantage – even be left without a place to live.

In one case cited by the ALRC an informal family agreement was made and an elderly parent moved in with his daughter and son in law. When the relationship broke down a few years later, the parent was told to leave the house. The parent tried to assert his rights under the family agreement but the daughter said the money she received from the sale of her father’s house was a gift, with no strings attached.

The ALRC recommended that state and territory tribunals be given jurisdiction over disputes within families over such agreements, to provide cheaper access to justice than courts.

An exemption under social security law operates to ensure that older persons who enter into agreements, where they transfer title to their home or proceeds from the sale of the home, will not lose their pension. This exemption is known as the ‘granny flat interest’, which arises when a person pays for a life interest or right to use certain accommodation in a residence that will be the person’s principal home.

The ALRC wants to see better evidence of these agreements, to make it easier and fairer when dealing with disputes. It has recommended that for the purposes of calculating an entitlement to the Age Pension, the Social Security Act should be amended to require that a ‘granny flat interest’ be expressed in writing.